The short-squeeze rip extended through the middle of the day today but on considerably lower volume as we tested up to QE3 highs and sucked in just a few more traders. It seems retail sales (and outlooks) disappointing, higher taxes for 77% of us, debt ceiling and spending cuts to come, and earnings outlooks being slashed en masse was not enough to break the market's spirit... But, when the FOMC minutes hinted at the punchbowl being removed (even modestly), the bid disappeared and S&P 500 futures dropped 10 points and Treasury yields spiked (with 10Y pushing to 8 month highs). USD strength (+1% on the week) and commodity weakness (though gold and silver remain marginally higher on the week) weighed on risk assets in general but algos went quiet and ES depth-of-market plunged as correlations broke. The usual e-bay style close saw ES ramp off the lows of the day to test VWAP and end the day-session there (-4pts or so close to close) as VIX was held lower (sub-15% at 2-month lows). We said yesterday this feels fragile and sure enough today showed its brittleness - as AAPL clung to yesterday's lows staring into the gap. Now the bulls await NFP hoping for a bad print, we assume?

Bonds snapped higher in yield as the rest of risk assets turned highly correlated and risk-off...

S&P 500 futures ramped to VWAP into the close of the day-session and are fading a little after-hours...

but VIX was held down as we dropped...

And the QE4EVA divide narrows modestly...

with 10Y yields pushing to May 2011 highs - 30Y up 25bps this week...

Commodities rolled over but remain up for the week...

as the USD rose by around 1% with EUR weakness post-repatriation in full force...

Much of the move today was risk-assets and equities recoupling from late-yesterday's ramp close. The chart below was more or less in line at around 230pmET yesterday, then ES (red) ramped into the close and CONTEXT (risk asset proxy) did not follow... today's close saw ES fade and Treasury weakness lead CONTEXT higher...

And note that 1) the move in TSYs is nothing compared to the selloff into QE3 (this is not the 'great' rotation; and 2) the FOMC's concern at ending QE is not driven their optimism on unemployment or the economy (see their forecasts) - its driven by their fear of the size and impact they are having on the market itself.

If Obama really wanted to destroy the place he would tell Ben to stop QE and get us a nice bond spike. That is the best way to cut spending. Romney said in his 47% speech that there would be a failed bond auction. I think O has the balls to do it.

The Fed may be concerned that TIPS went bid as USTs were sold off on the last meltup, USD is bid also with oil. It's all down to the oil price which is a inflation pr-curser to all out stagflation. The Fed is losing control to issue that statement.

Maybe, there was short squeeze last session. I wanna see where that dirty, filthy money flows into. We could be redux last downgrade in 2011, which would mean all into USTs and USD. Indust commodities will get smacked to hell.

That could be the plan. Or maybe O calls the debt ceiling bluff? we thought he wanted to go over the cliff...maybe he was looking for the big fish. hit the debt ceiling and have a full blown panic. blame the repubs and start shooting executive orders left and right. huge power grab.

I think the fiscal cliff drama has done more damage to the stock market below the water line than is evident from top side. Retirees who were uncertain about the 2013 tax picture certainly withdrew more from their accounts in dec. 2012 than they would have otherwise. The irony is that if the market looks like it will tumble in spite of all their efforts the fed will have to fake-tighten to keep their ominipotence mystique alive.

The real damage is to the bond market. No fiscal discipline, chaos in Washington, not a good look for foreign holders of US debt. With negative real yields, declining liquidity thanks to Fed why would anyone want to hold this stuff? Watch TBT.

...and behind closed doors at the FED - 'fuck, those minutes were just supposed to tank gold, not the fucking bond market! Now what the fuck are we supposed to do?!' Serves them right, self-serving rats.

My guess would be that rates will rise until a deal is done on the debt limit. QE4 is on hold until a new debt limit has been established. Once a new higher limit is legislated, rates will resume their downward trend and Treasury rates will fall as the government issues new debt and the Federal Reserve resumes QE4.

On a lighter note-the 100 richest people in the world are $250 billion richer in 2012 than they were in 2011. That makes me feel better as my paycheck reflects an extra $1800 a year coming out in taxes.

In practice, it works like this: For every $10,000 a bank gives out as loans, $1,000 or $2,000 have to be deposited at the central bank. That means, if a bank collects $100,000 in deposits, it could keep $10,000 for liquid cash, put $90,000 into deposit with the central bank, and it is then allowed to create $900,000 of fresh money just by writing the figures on someone’s accounts!

In the case of the government needing money to spend, the procedure is slightly different, but the result is the same. The government has to issue papers that promise interest and repayment. Those papers are "bought" by the banks, who "sell" them to their wealthy clients, or who may also keep them, and the government gets credited an equivalent sum of money.

The irony here is that the government, who should by rights be the issuing authority of the money that circulates in the country, has to borrow the money from privates (through the bank) and that is has to pay interest for this. Now we start to see why the government never has money, and why much of our taxes go "off the top" of the budget, towards debt service.

The difference between Democrats and Republicans is apparent; Democrats are gleeful when they kick the can and Republicans are reluctantly gleeful. Not really a dimes bit of difference between the two really. Like Ron Paul said, 'we are at the point of no return' which means there is nothing anyone can do but kick the can down the road. The fed will print and the house will spend. End of story.